May 8 (Reuters) - Green Mountain Coffee Roasters Inc GMCR.O stripped its founder, Robert Stiller, of his role as chairman and demoted another director for selling company shares at a time when trading by insiders was prohibited.

The maker of Keurig single-serve coffee brewers said on Tuesday the two men sold their shares to cover margin calls following a near 50 percent drop in Green Mountain’s stock price since it reported disastrous quarterly results last Wednesday.

Shares in the company fell nearly 4 percent on the news of the prohibited trading, which raised fresh questions about the credibility of a management team already under scrutiny by hedge fund manager David Einhorn and others who have questioned Green Mountain’s growth prospects and accounting practices. [ID:nL4E8G373P]

Green Mountain appointed Michael Mardy, chief financial officer of Tumi Holdings Inc TUMI.N, as interim chairman and Hinda Miller, a Vermont state senator, as chair of the governance and nominating committee.

“It definitely reflects poorly on the company’s corporate governance that they were allowed to pledge such a big portion of their stock on margin,” said Eliezer Fich, associate professor of finance at Drexel University.

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ANALYSIS: One analyst had it right [ID:nL1E8G8DH1]

Christmas for Green Mountain shorts [ID:nL4E8G37C4]

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Investors can borrow money from banks or brokerages using their stock holdings as collateral. A margin call occurs when the value of those holdings falls beyond a threshold that forces the investor to put up more cash or sell shares to repay the loan.

Stiller, who founded Green Mountain in 1981 as a cafe in Vermont, had pledged more than 78 percent of his shares in the company as collateral for loans as of Jan. 26, according to a regulatory filing.

The company said late on Tuesday that Stiller’s brokerage account at Deutsche Bank sold 5 million Green Mountain shares on Monday to cover margin calls. It also said lead director William Davis sold 400,000 shares last Friday and another 148,000 shares on Monday to cover margin calls.

These trades were outside the window when insiders are permitted to trade, Green Mountain said. The company declined to specify the dates of the window.

It also accused Davis of breaching a new corporate policy that prohibited him from pledging more shares to his margin account after Jan. 1.

“These forced sales are disappointing and beyond the control of the company,” Green Mountain said in a statement. “The board determined that it was in the best interest of the company and its shareholders for Mr. Stiller and Mr. Davis to relinquish their leadership positions on the board as well as their committee roles.”

While Stiller and Davis remain on the board, they will not receive any future payments until further notice. The board also demanded that Stiller and Davis settle all outstanding margin loans by the end of this year.

When asked why the men were not kicked off the board, spokeswoman Suzanne DuLong said that “appropriate action” was taken given the circumstances.

When asked why they were allowed to be so leveraged, she said, “Mr. Stiller and Mr. Davis make their own decisions about their personal finances.”

Green Mountain declined to make Stiller and Davis available for comment.

NOT THE FIRST TIME

Once a high-flyer, shares of Green Mountain have lost 77 percent of their value since September on concerns that increased competition would stymie growth. The decline, which pulled the company’s market value down to about $4 billion, was fueled by in part by short-sellers like Einhorn.

Green Mountain also faces several class-action lawsuits filed by shareholders. One alleges the Waterbury, Vermont-based company misled shareholders and issued false or misleading statements about its financial condition.

Stiller and Davis are not the first officials to run into problems with their companies due to margin calls triggered by a swooning stock price.

At the height of the financial crisis, margin calls forced stock sales by executives from a slew of companies including Sumner Redstone’s Viacom Inc (VIAB.O), Boston Scientific Corp (BSX.N) and Williams-Sonoma Inc (WSM.N).

Margin calls also forced Chesapeake Energy Corp (CHK.N) chief executive Aubrey McClendon to unload more than 90 percent of his shares in the company at a $2 billion paper loss. His selling contributed to an 88 percent fall in Chesapeake’s stock.

When asked if Stiller and Davis’ stock sales contributed to the 47 percent drop in Green Mountain’s share price in the last four days, the spokeswoman, DuLong, declined to comment.

The latest stock sale by Stiller, who also holds stakes in Krispy Kreme Doughnuts Inc KKD.N and Noble Romans Inc NROM.OB, cuts his stake in Green Mountain by a third to roughly 6 percent, according to Thomson Reuters data.

Stiller had sold 1 million shares in February, just before Starbucks Corp (SBUX.O) announced plans to launch its own single-cup coffee and espresso drink machine, putting it in direct competition with Green Mountain’s Keurig brewers. The news drove Green Mountain shares down 16 percent at the time.

(Reporting by Mihir Dalal in Bangalore and Martinne Geller, Michael Erman and Jed Horowitz in New York; Editing by Bernard Orr and Matt Driskill)

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